City says creditor claims 'flawed'

Wednesday

Feb 20, 2013 at 12:01 AMFeb 20, 2013 at 9:07 AM

STOCKTON - The claim that Stockton could have avoided bankruptcy amounts to a fairy tale written by multibillion-dollar financiers in their Wall Street offices far removed from the city's violent streets.

Scott Smith

STOCKTON - The claim that Stockton could have avoided bankruptcy amounts to a fairy tale written by multibillion-dollar financiers in their Wall Street offices far removed from the city's violent streets.

So say Stockton officials in their latest arguments filed in advance of a hearing next week, when U.S. Bankruptcy Judge Christopher Klein is expected once again to take up Stockton's Chapter 9 case.

Stockton became the nation's largest city to seek bankruptcy protection on June 28, but in nearly eight months it has yet to overcome the first hurdle - proving it was in fact broke and officials negotiated with creditors in good faith.

In a hearing set for Tuesday, Klein is expected to decide how to handle these questions. He could set a trial for March or April lasting from one day to one week.

But the city officials argue no hearing is needed because they've made their case, dismissing creditors' objections as "armchair quarterbacking."

"Their assumptions are flawed, their methodology sloppy and their conclusions invalid," Stockton City Manager Bob Deis said in a written statement.

Deis further accused creditors Assured Guaranty and National Public Finance Guaranty of taking a "scorched-earth" approach, trying to squeeze every penny from the city while disregarding the safety of Stockton residents.

Only after the judge deems Stockton eligible for bankruptcy protection can city officials write a plan of adjustment, restructuring the city's debts. The city accuses the creditors of delaying the process at a great expense to Stockton.

The city is eligible for bankruptcy, officials say in court papers.

They argue that over three deficit years Stockton cut $90 million, and the City Council faced another deficit of $26 million on July 1. The city trimmed its police by 25 percent, and by 2012 the city hit a record number of homicides.

The city argues that it negotiated in good faith, engaging its labor groups and creditors for three months before filing for bankruptcy. It disclosed 200,000 pages of documents and thousands of emails.

It also provided a 790-page "ask," a detailed document outlining what each creditor would have to give up to keep Stockton from bankruptcy court. Assured Guaranty and National Public didn't make counteroffers, the city said.

Creditors also criticized the city for failing to engage the California Public Employees' Retirement System in negotiations. Rather, the city opted to make investors take losses unfairly, creditors said.

Stockton's attorneys countered that there were no concessions to take from CalPERS, which is a conduit for the city to fund its employee pensions.

Any cuts to CalPERS would come out of the city employees' compensation, such as police officers, who have already fled from Stockton in alarming numbers at a time when they were needed most, the city argues.

If Stockton tried to sever its ties with CalPERS, as creditors have also suggested, the city would incur a $1 billion bill from the state pension fund. Ironically, that would have to be paid before creditors, the city said.

There is also no denying that Stockton was on the brink of insolvency, officials said, when they filed for bankruptcy last summer. It is well documented that Stockton would not have made payroll the following month, they say.

Creditors have argued that the city could have trimmed an additional 15 percent across the board from the city budget, closed libraries and senior centers and ended after-school programs for teens.

From the perspective of Wall Street creditors 3,000 miles away, that might have looked like a good way to save money, so that Stockton could pay them, city officials said.

The city already had trimmed library hours by nearly half. After-school programs may be niceties in affluent communities, but city officials said they're essential in Stockton, which has one of the nation's highest illiteracy rates.

The creditors' "hired guns," who did their own analysis on Stockton and suggested fixes, said that the city should have "put all the options on the table" and "rolled up its sleeves."

Marc Levinson, the city's lead bankruptcy attorney, said in court papers that those phrases rang hollow to officials in Stockton.

"While catchy sound bites, such phrases are no more meaningful than the patter of a self-help guru peddling his latest book," he said. "The evidence is both overwhelming and uncontradicted that the city was insolvent."